SEC says Rooney Rule proposals are micromanagement

Apr 16, 2021
AFL-CIO asks several companies to implement ‘diverse candidate search policy’

The SEC has said Activision Blizzard and Amazon are free to exclude union-backed shareholder proposals seeking to increase diversity among the companies’ employees on the grounds that the measures constitute micromanagement.

The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) Reserve Fund filed the proposals, each of which states: ‘Shareholders request that the board of directors of [the company] adopt a policy for improving workforce diversity by requiring that the initial pool of candidates from which new employees are hired by the company shall include, but need not be limited to, qualified women and minority candidates (a ‘diverse candidate search policy’).’

In its supporting statement, the AFL-CIO says the proposals are modeled on the National Football League’s adoption of the Rooney Rule, which requires teams to interview minority candidates for head coaching and other senior posts. The union says the proposals are intended to make sure the companies’ recruitment pools for external hires are adequately diverse and are designed to give the boards flexibility in developing the specific terms of a diverse candidate search policy with respect to race, ethnicity, gender, sexual orientation, disability and other groups.

The union says a diverse workforce at all levels within a company can improve its long-term performance: ‘Workforce diversity provides a competitive advantage to companies by helping to attract and retain talented employees, strengthening customer relationships, increasing employee satisfaction, improving corporate decision-making and enhancing corporate reputations.’

The AFL-CIO also commends steps that each of the companies have taken to promote workforce diversity, equity and inclusion. In Amazon’s case, the union notes that the board in 2018 adopted new language requiring the consideration of women and minority candidates in the pool from which director candidates are selected. ‘In our view, such a policy also makes sense for our company’s workforce hiring decisions and will complement our company’s existing workforce diversity efforts,’ the union adds.

Brandon Rees, deputy director for corporations and capital markets at the AFL-CIO, tells Corporate Secretary that the union last fall filed similar proposals with five major US banks and ended up withdrawing each of them because the banks had implemented or were planning to implement Rooney Rule-style policies – or because they already had such policies but had simply not disclosed them before.

The AFL-CIO then turned its attention to the technology sector, filing the proposals with Activision Blizzard and Amazon and also one with Electronic Arts (EA). The EA proposal was withdrawn following engagement between the company and the union, Rees says. The AFL-CIO also planned to withdraw its proposal with Activision Blizzard after the company responded to its engagement, but the SEC decision was posted first, he adds.

Both Amazon and Activision Blizzard filed separate requests for no-action relief if they exclude the proposals from their proxy statements.

Activision Blizzard states that the measure may be excluded under Rule 14a-8(i)(7) on the grounds that it deals with the company’s ‘ordinary business operations.’

The company argues that the proposal ticks the box of each of the key considerations that underpin the ordinary business exclusion: that ‘[c]ertain tasks are so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight;’ and that a proposal should not ‘seek to micromanage the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.’

Activision Blizzard notes in its request that it has implemented a Rooney Rule policy for new independent director nominees and any new CEO recruitment. ‘The company takes matters of diversity seriously and is committed to building and sustaining a culture of belonging, where everyone thrives and diversity drives business value and growth,’ it states.

‘While the company has implemented a Rooney Rule policy as envisioned, implementing a policy that would extend such an approach to all hiring decisions amounts to an unworkable encroachment on the company’s ability to run its business and compete for talent in a highly competitive, fast-moving market.’

In its request, Amazon states: ‘The company fully supports the objective of this proposal, which is to improve workforce diversity, and… the company has many programs in place across its worldwide operations that are designed to achieve that objective.

‘Moreover, the company’s leadership has indicated its commitment to advancing diversity, equity and inclusion as well as fostering a company culture that values and respects diversity and inclusion within the company, and thus the company has put into place many policies and programs that fully align with the objective of the proposal.’ As such, it argues that the proposal may be excluded under Rule 14a-8(i)(10) on the grounds that Amazon has ‘substantially implemented’ it.

The company also argues that the proposal falls within the scope of the ordinary business operations exclusion because it is focused on the hiring process and because it ‘seeks to micromanage the company’s diversity recruiting processes across a huge range of circumstances, many of which are more effectively handled through the company’s existing workplace diversity programs.’

The SEC posted to its website last Friday in separate responses that in each company’s case it agrees Rule 14a-8(i)(7) provides a basis to exclude the proposals based on the micromanagement argument. It does not mention the ‘substantially implement’ argument.

The proposal does not feature in Amazon’s 2021 proxy statement, which was released yesterday. Activision Blizzard has not yet published its proxy statement.

Rees says he is disappointed that the SEC decided the proposals may be excluded on the basis of micromanagement. He says the underlying issue of diversity hiring transcends the ordinary business argument as a whole, and that the proposals should not be considered micromanagement because many other companies have adopted Rooney Rule-type policies, including at the board level. ‘If it makes sense for the boardroom, it makes sense for the workforce as a whole,’ he says. 

An Activision Blizzard spokesperson says in a statement: ‘We are pleased with the SEC’s decision. Activision Blizzard has long been and will continue to be absolutely committed to diversity. This commitment begins with our CEO and permeates throughout our entire organization. We recognize that different views, voices and talents enable the creation of the most inspired, creative content for our broad audiences.’

Requests for comment from Amazon and EA were not returned immediately.

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